DDHOPED

WORKSHOPPROCEEDINGS
AssessingtheBenefitsofAvoidedClimate
Change:CostBenefitAnalysisandBeyond

TheSocialCostofCO2andthe
OptimalTimingofEmissions
Reductions underUncertainty

ChrisHope
JudgeBusinessSchool
UniversityofCambridge

May2010


ThisworkshopwasmadepossiblethroughagenerousgrantfromtheEnergyFoundation.
EnergyFoundation
301BatterySt.
SanFrancisco,CA94111

WorkshopSpeakers
DavidAnthoff,EileenClaussen,KristieEbi,ChrisHope,RichardHowarth,Anthony
Janetos,DinaKruger,JamesLester,MichaelMacCracken,MichaelMastrandrea,
SteveNewbold,BrianONeill,JonORiordan,ChristopherPyke,MarthaRoberts,
SteveRose,JoelSmith,PaulWatkiss,GaryYohe

ProjectDirectors
SteveSeidel
JanetPeace

ProjectManager
JayGulledge

ProductionEditor
L.JeremyRichardson

ContentEditors
JayGulledge,L.JeremyRichardson,LiwaywayAdkins,SteveSeidel

SuggestedCitation
Hope,C.2010.TheSocialCostofCO2andtheOptimalTimingofEmissionsReductions
underUncertainty.InAssessingtheBenefitsofAvoidedClimateChange:CostBenefit
AnalysisandBeyond.Gulledge,J.,L.J.Richardson,L.Adkins,andS.Seidel(eds.),
ProceedingsofWorkshoponAssessingtheBenefitsofAvoidedClimateChange,
March1617,2009.PewCenteronGlobalClimateChange:Arlington,VA,p.101
115.Availableat:http://www.pewclimate.org/events/2009/benefitsworkshop.

Thecompleteworkshopproceedings,includingvideoof17expertpresentations,thissummaryreport,
andindividualoffprintsofexpertpapersareavailablefreeofchargefromthePewCenteronGlobal
ClimateChangeathttp://www.pewclimate.org/events/2009/benefitsworkshop.

May2010

PewCenteronGlobalClimateChange

2101WilsonBlvd.,Suite550
Arlington,VA22201

102 Hope:SCCandEmissionsReductionsUnderUncertainty |PewBenefitsWorkshop

TheSocialCostofCO2andtheOptimalTiming
ofEmissionsReductionsunderUncertainty

ChrisHope
JudgeBusinessSchool
UniversityofCambridge

Abstract
ThesocialcostofCO2istheextraclimatechangeimpactthatwouldbecausedbythe
emissionofonemoretonneofCO2intotheatmosphere.PAGE2002isanintegrated
assessmentmodelthatcanfindthesocialcostofCO2.Itusessimpleequationstocapture
complexclimaticandeconomicphenomena.Thisisjustifiedbecauseallaspectsofclimate
changearesubjecttoprofounduncertainty.UsingthesameinputsasintheSternreview,
PAGE2002findsthemeansocialcostofCO2in2008tobe$120pertonneofCO2,growing
atabout2percentperyear,withawiderangefrom$25to$320,almostindependentofthe
emissionsscenarioonwhichtheextratonneofemissionsissuperimposed.Optimalglobal
emissionsfallto45percentoftheiryear2000levelsby2020,andto25percentoftheir
year2000levelsby2060.ThetheoreticallycorrectpriceonCO2isthesocialcostofCO2on
theoptimalemissionpath.AsthesocialcostofCO2doesnotvarymuchwiththeemissions
path,wedon'tneedtobetooworriedabouttheexactdetailsoftheoptimalpathwhen
settingapriceonCO2.Ontheotherhand,seeminglytechnicalchoices,aboutequity
weights,theexponentoftheimpactfunctionandthepuretimepreferencerate,have
almostasmuchinfluenceasthemoreobviousclimatesensitivityonpolicyrelevantresults
likethesocialcostofCO2.

PewBenefitsWorkshop|Hope:SCCandEmissionsReductionsUnderUncertainty 103


Introduction
Thereisnowagreatdealofinterestinattackingtheproblemofclimatechangebyputtinga
priceonemissionsofcarbondioxide(CO2)(seeforinstance,Gore,2007,Nordhaus,2009).
ThesocialcostofCO2istheextraclimatechangeimpactthatwouldbecausedbythe
emissionofonemoretonneofCO2intotheatmosphere.Thepolluterpaysprinciplemeans
thatanyonewhoemitsatonneofCO2shouldbechargedthesocialcostofCO2fordoingso,
eitherthroughatax,orthroughthepurchaseofatradablepermit.Findingthesocialcostof
CO2requiresanintegratedassessmentmodelamodelwhichcombinesscientificand
economicinformationtoproducepolicyrelevantresults.

ThePAGE2002model
PAGE2002issuchanintegratedassessmentmodel,estimatingthetemperaturerisesand
impactsthatresultfromauserspecifiedemissionsscenario.Itistheintegratedassessment
modelusedbytheSternreviewinitscalculationofimpactsandsocialcosts(Stern,2007).
Itusesanumberofsimplifiedformulastorepresentthecomplexscientificandeconomic
interactionsofclimatechange.AfulldescriptionofthemodelcanbefoundinHope(2006)
andHope(2008).Mostofthemodelscoefficientsanddatarangesarecalibratedtomatch
theprojectionsoftheThirdAssessmentReportoftheIntergovernmentalPanelonClimate
Change(Houghtonetal.,2001).
Themodelincludestentimeintervalsspanningthe200yearsfrom2000to2200,divides
theworldintoeightregions,andexplicitlyconsidersthreedifferentgreenhousegases
(carbondioxide,methane,andsulphurhexafluoride)withothergasesincludedasan
excessforcingprojection.
Threetypesofimpactarecalculated:
economicimpacts,whichareimpactsonmarketedoutputandincome,insectorssuch
asagricultureandenergyuse,thataredirectlyincludedinGDP;
noneconomicimpacts,whichareimpactsonthingslikehealthandwildernessareas
whicharenotdirectlyincludedinGDP;and
discontinuityimpacts,whicharetheincreasedrisksofclimatecatastrophes,suchasthe
meltingoftheGreenlandorWestAntarcticIceSheet.
Thesethreetypesofimpactsaremeasuredineconomictermsandsummedtocalculate
totalimpacts.Ofcoursethequalityanduncertaintyintheestimatesareheavilydependent
ontheabilityofeconomiststomaketheprimarymeasurementswhichthePAGE2002
modelsimulates.Thisabilityisreasonablefortheeconomicimpacts,limitedforthenon
economicimpacts,andrudimentaryforthediscontinuityimpacts,whichmotivatestheuse
ofprobabilitydistributionsthroughoutthemodel.

104 Hope:SCCandEmissionsReductionsUnderUncertainty |PewBenefitsWorkshop


ThePAGE2002modelusesrelativelysimpleequationstocapturecomplexclimaticand
economicphenomena.Thisisjustifiedbecausetheresultsapproximatethoseofthemost
complexclimatesimulations,asshownbyHope(2006),andbecauseallaspectsofclimate
changearesubjecttoprofounduncertainty.
Toexpressthemodelresultsintermsofasinglebestguesscouldbedangerously
misleading.Instead,arangeofpossibleoutcomesshouldinformpolicy.PAGE2002builds
upprobabilitydistributionsofresultsbyrepresenting31keyinputstotheimpact
calculationsbyprobabilitydistributions,makingthecharacterizationofuncertaintythe
centralfocus,asrecommendedbyMorganandDowlatabadi(1996);themostfrequently
reportedresultsfromPAGEarethemeanoutcomesfrom10,000runsofthemodel,andthe
595percentconfidenceintervalsrepresentingtheuncertaintyintheoutputs.

ThesocialcostofCO2
Thetoprowoftable1showsthesocialcostofCO2calculatedbyPAGE2002with
projectionsofGDP,populationandemissionsofgreenhousegasestakenfromIPCC
ScenarioA2(NakicenovicandSwart,2000)to2100,andconstantthereafter.Thepuretime
preferencerateis0.1percentperyear,andtheequityweightis1,asintheSternreview,
meaningthata$1losstosomeonewithanincomeof$1000peryeariscountedasten
timesasbadasa$1losstosomeonewithanincomeof$10,000peryear.Thisgives
consumptiondiscountratesderivedfromtheRamseyruleoftheorderof1.5percentper
yearinannex1countries(i.e.industrializednationsliketheUSA,Germany,andJapan),
higherinnonannex1countries(i.e.developingcountries),anddecliningovertime.This
consumptiondiscountratedoesnottakeaccountofthecovariancebetweenclimate
impactsandconsumptionthatcouldperhapsmakethediscountratelowerstill.

Table1.ThesocialcostofCO2 in2008,byscenario*
20002200 $US(2008)
5percent mean 95percent
ScenarioA2 25 120 320
450scenario 20 125 370
*Basedon10000PAGE2002modelrunsusing0.1percentpuretimepreferencerate

UndertheA2scenario,PAGE2002projectsthemeanCO2concentrationtobeabout815
ppmby2100andthemeanglobalmeantemperaturetobe4.1Cabovepreindustrial
levelsby2100.ThemeansocialcostofCO2in2008is$120pertonneofCO2,buttherange
iswide,from$25to$320.Thiswiderangeisasimpleconsequenceoftheuncertainties
thatsurroundmostpartsoftheclimatechangeissue,bothscientificandeconomic.
Thesecondrowoftable1demonstratesaresultthatsurprisesmanypeople:thesocialcost
ofCO2hardlydependsatallontheemissionsscenarioonwhichtheextratonneof

PewBenefitsWorkshop|Hope:SCCandEmissionsReductionsUnderUncertainty 105


emissionsissuperimposed.Inthesecondrow,thesocialcostofCO2iscalculatedfora
scenariowiththesameprojectionsofGDPandpopulation,butwithemissionsof
greenhousegasesaimedatstabilizingtheconcentrationofCO2at450partspermillion
(ppm)(Wigley,2003).ThemeansocialcostofCO2in2008underthis450scenariois$125
pertonneofCO2;thismeanvalueandtherangearealmostthesameasunderthebusiness
asusualA2scenario.
The450scenarioinvolvesaggressiveabatementmeasures,withglobalemissionsofCO2
35percentlowerin2050and70percentlowerin2100.AsPAGE2002includesstimulation
ofnaturalCO2asabadfeedbackloop(usingtheIPCCestimatesoflesseffectiveuptakeof
CO2byoceansastemperatureincreases),itactuallypredictsameanCO2concentrationfor
the450scenariothatisslightlyhigherthan450ppmin2100,butstillsubstantiallylower
thantheA2scenario.MeanCO2concentrationisabout515ppmby2100,andmeanglobal
meantemperatureis3.1Cabovepreindustrialby2100.
ThereasonwhythesocialcostofCO2doesnotvarybetweenthescenariosisnot
straightforward.Itiscausedbytheinterplaybetweenthelogarithmicrelationshipbetween
forcingandconcentration,whichmakesoneextratonunderthelowerconcentrationsof
the450scenariocauseabouttwicethetemperaturerisethatitcausesundertheA2
scenario,andthenonlinearrelationshipofimpactstotemperaturewhichmakesoneextra
degreeoftemperatureriseontopofthelowertemperaturesofthe450scenariocause
onlyabouthalftheextraimpactitcausesundertheA2scenario.Thesetwoeffectsroughly
canceleachotherout,leavingthemeansocialcostofCO2thesameundereachscenario.
Thisempiricalresultisnotuniquetothisparticularcombinationofbaselineand
abatementtargetandappearstoberobust(Hope,2006a).Thetheoreticallycorrectprice
onCO2isthesocialcostofCO2ontheoptimalemissionpath.AsthesocialcostofCO2does
notvarymuchwiththeemissionspath,wedon'tneedtobetooworriedabouttheexact
detailsoftheoptimalpathwhensettingapriceonCO2.

MajorinfluencesonthesocialcostofCO2
ThesocialcostofCO2maynotvarymuchwiththepathofemissions,butitisstrongly
affectedbyseveralofthevariablesinthePAGE2002model.Figure1showsthetop12
influencesonthesocialcostofCO2undertheA2scenario.Foreachinput,thebarshowsthe
amountbywhichthesocialcostofCO2wouldincreaseiftheinputinquestionincreasedby
onestandarddeviation.
Thethreetopinfluencesaretheclimatesensitivity,whichisthetemperaturerisethat
wouldoccurforadoublingofCO2concentration,theimpactfunctionexponent,which
measureshowcurvedtheimpactfunctioniswithtemperature,andthenoneconomic
impactparameter,whichmeasuresthenoneconomicimpactfora2.5Ctemperaturerise.
AllthreearepositivelycorrelatedwiththesocialcostofCO2.Fortheclimatesensitivity,an

106 Hope:SCCandEmissionsReductionsUnderUncertainty |PewBenefitsWorkshop


Figure1.MajorinfluencesonthesocialcostofCO2(Source:PAGE2002modelrunsforscenario
A2using0.1percentpuretimepreferencerate)

Climate sensitivity 64

Impact function exponent 47

Non-economic impact 22

Tolerable before discontinuity -15

Chance of discontinuity 13

Half-life of global warming -13

Loss if discontinuity occurs 12

India weights factor 12

Proportion of CO2 emitted to air 11

Sulfate indirect effect 8

Economic impact 8

Africa weights factor 8

-20 -10 0 10 20 30 40 50 60 70
$(2008)/ tCO2

increaseofonestandarddeviation,whichisabout0.75Castheclimatesensitivitytakesa
triangulardistributionwithminimum,mostlikelyandmaximumvaluesof1.5,2.5and5C
(Houghtonetal.,2001),wouldincreasethesocialcostofCO2by$64perton.Havingthis
quantifiedmeasureofinfluenceenablesustoestimatewhatwouldhappentothesocial
costofCO2ifoneofthehigherestimatesofclimatesensitivitythathavebeenproduced
sincetheIPCCthirdassessmentreportturnouttobecorrect.Thenoneconomicimpact
parameterisaboutthreetimesasinfluentialastheeconomicimpactparameter,largely
becausethemodelassumesthatagreatdealoftheeconomicimpactscanbeadaptedto,at
leastinrichcountries.
Threeofthenextfourinfluencesrelatetothediscontinuityimpact.Thetemperaturerise
thatcanbetoleratedbeforethereisanychanceofadiscontinuityisnegativelycorrelated
withthesocialcostofCO2,asariseinthisparameterleadstoalowersocialcostofCO2.Itis
abitsurprisingthatthediscontinuityimpactshouldhavesuchalargeinfluenceontodays
socialcostofCO2,asanydiscontinuitythatmightoccurisfarmorelikelytohappeninthe
22ndcenturythaninthisone.Butthediscontinuityislargeenough,andthediscountrate
smallenough,thatitdoesindeedemergeasamajorinfluence.Theonlyreasonthatthe
discountrateitselfdoesnotappearasamajorinfluenceisbecauseintheseresultsthepure

PewBenefitsWorkshop|Hope:SCCandEmissionsReductionsUnderUncertainty 107


timepreferencerateisfixedatthesinglevalueof0.1percentperyear,andtheequity
weightatthesinglevalueof1,usedintheSternreview.
Thatthemajorinfluencesdivideintosixscientificandsixeconomicparametersisanother
strongargumentforthebuildingofintegratedassessmentmodelssuchasPAGE2002.
Modelsthatareexclusivelyscientific,orexclusivelyeconomic,wouldomitpartsofthe
climatechangeproblemwhichstillcontainprofounduncertainties.

GrowthinthesocialcostofCO2overtime
Figure2showshowthePAGE2002estimatesforthesocialcostofCO2varywiththedate
thatthecarbondioxideisemittedundertheA2scenario.Thethicker,red,lineshowsthe
meanvalues,thethinner,orangelinesshowthe5percentand95percentuncertainty
pointsontheprobabilitydistribution.Onaverage,themeanvaluesincreasebyjustunder
2percentperyear,asshownbythedashedblacklineinthefigure;by2040themean
estimatehasrisentoabout$200pertonneofCO2.
ThesocialcostofCO2growsaswemoveclosertothetimethatthemostsevereimpactsof
climatechangearelikelytooccur.Therateofgrowthiskeptdownsomewhatbythetime
horizonof2200forcalculatingimpacts;witha0.1percentpuretimepreferencerate,
omittinganyimpactsafter2200givesanincreasinglylargedownwardbiastoestimatesof
thesocialcostofCO2aswemoveintothefuture.

Figure2.ThesocialcostofCO2 bycalendaryearas estimatedfromPAGE2002

modelrunsforscenarioA2using0.1percentpurerateoftimepreference.
$US(2008)/tonne CO2

Year
108 Hope:SCCandEmissionsReductionsUnderUncertainty |PewBenefitsWorkshop


Optimalemissionreductions
Optimalemissionscanbedefinedasthepathofemissionswhichminimisethemeannet
presentvalueofthesumofclimatechangeimpactsandabatementcosts.Figure3shows
theoptimalemissionsupto2060calculatedbythePAGE2002model,usingtheStern
reviewassumptionswhichgivethesocialcostofCO2resultsreportedabove.
TheCommonPolesImage(CPI)scenarioisusedasthebusinessasusualscenario(den
Elzenetal,2003),ratherthantheA2scenarioastheinitialanalysiswasperformedforthe
InnovationModellingComparisonProjectwhichstandardisedonthisBAUscenario,and
theGDP,populationandnonCO2greenhousegasemissionsfromthisscenarioareused
throughouttheanalysisofoptimalemissions.
Theoptimalglobalemissionsfallto45percentoftheiryear2000levels(a55percent
emissionsreduction)by2020,andto25percentoftheiryear2000levels(a75percent
reduction)by2060.TheseemissionsgivemeanCO2concentrationsin2100of445ppm,
witha5to95percentrangeof415to485ppm,andannualmeanglobalmeantemperature
in2100of2.6Cabovepreindustriallevels,witha5to95percentrangeof1.5to4.1C.
Forcomparison,figure3alsoshowsthe500ppmCO2emissionpath,developedusingthe
MAGICCmodel(Wigley,2003).DuetoafeedbackloopinPAGE2002scarboncyclethat
simulatestheoceansdecreasingcarbonsequestrationabilityasthetemperaturerises,
PAGE2002smeanexpectedconcentrationsin2100arehigherthanthestatedvalueforthe
scenariobyaround70ppm,withafairlybroadrange.Thereforethispathisdescribedas
500ppm,ratherthan500ppm,infigure3.WhatisclearisthatiftheSternreview
conclusionsareaccepted,theoptimalemissioncutbacksjustifiedbythemaremuch
steeperthanthosewhichwouldleadtothestabilizationofCO2concentrationsat500ppm
ormoreofCO2.

Figure3.OptimalemissionsofCO 2 bycalendaryearasestimated byPAGE2002

modelrunsfromCPIbaselineusing0.1percentrateofpuretimepreference.
40000
Milloins oftonnes ofCO2

Emissionsto
stabilizeat500ppm

20000

Optimizedemissionswith
SternReviewdiscountrates

0
2000 2020 2040 2060

PewBenefitsWorkshop|Hope:SCCandEmissionsReductionsUnderUncertainty 109


AlternativeassumptionsandtheireffectonthesocialcostofCO2
ToshowtheeffectofmakingchangestotheinputstothePAGE2002model,wecantryout
analternativesetofassumptionsandseethechangesinthesocialcostofCO2andthe
majorinfluencesontheresult.Thealternativeassumptionsreflectsomeoftheadvancesin
understandingandconcernsthathavebeenraisedsincetheSternreviewspublication.The
socialcostofCO2thatresultsshouldbeunderstoodasanillustrationofthePAGE2002
modelsabilitytousesomeplausiblealternativeinputs,butnotafullyupdatedandpeer
reviewedcalculation.

Puretimepreferencerateandequityweight
TheSternreviewschoiceofalow0.1percentperyearpuretimepreferenceratehasbeen
apointofcontentionwithintheeconomicscommunity.Manycriticsofthereviewfavoured
higherdiscountrates(e.g.,Nordhaus,2007;TolandYohe,2006),whilethereviews
authorscontinuedtodefendapuretimepreferencerateclosetozero(Dietzetal.,2007).
Others1pointoutthatwedonotobservethemarketrateofinterest,butrathera
multitudeofdifferentratesofreturntoassetshavingdifferentcharacteristicsandso
observationsofmarketinterestratesareoflimiteduseforevaluatinglongtermpublic
investmentslikethoserequiredtotackleclimatechange.Ratherthantryingtoresolvethis
dispute,thealternativeassumptionsassumearangeofpossiblepuretimepreferencerates
of<0.1,0.5,1>percentperyear(here,andthroughouttherestofthispaper,thetriangular
bracketsdenoteatriangularprobabilitydistributionwith<minimum,mostlikely,
maximum>parametervalues).Similarly,thealternativeassumptionshavearangeof
equityweightsof<0.5,1,2>.Combiningthemaximumvalueswouldgiveaconsumption
discountrateofabout34percentperyear,ifgrowthratesinpercapitaGDPareinthe
rangeof12percentperyear.

Adaptation
ThePAGE2002defaults,adoptedbytheSternReview,assumethatsubstantial,nearly
costlessadaptationwilloccur;thereporteddamageestimatesarefordamagesremaining
afterthatadaptationtakesplace.Specifically,PAGEassumesthatindevelopingcountries,
50percentofeconomicdamagesareeliminatedbylowcostadaptation.InOECDcountries,
theassumptionisevenstronger:100percentoftheeconomicdamagesresultingfromthe
first2degreesofwarming,and90percentofeconomicdamagesabove2degrees,are
eliminated.Fornoneconomic,noncatastrophicdamages,adaptationisassumedto
remove25percentoftheimpacteverywhere.Noadaptationisassumedfordiscontinuity
damages.
Theseadaptationassumptionsseemoptimistictosomecommentators,particularlyforthe
economicsector(Ackermanetal.,2009).Sothealternativeassumptionshaveadaptation

1
SeethepaperbyAckermanetal.inthisvolume.

110 Hope:SCCandEmissionsReductionsUnderUncertainty |PewBenefitsWorkshop


thatisonlyabouthalfaseffective:indevelopingcountries,25percentofeconomic
damagesareeliminatedbylowcostadaptation,whileinOECDcountries,100percentof
theeconomicdamagesresultingfromthefirst1degreeofwarming,and50percentof
economicdamagesabove1degree,areeliminated.

Discontinuity
PAGE2002assumesthatathresholdtemperaturemustbereachedbeforecatastrophic
events,whichwouldleadtoimpactsonGDPanorderofmagnitudehigherthannormal
climateimpacts,becomepossible;oncethatthresholdiscrossed,theprobabilityof
catastrophegraduallyrisesalongwiththetemperature.Twooftheuncertainparameters
areinvolvedhere.Oneisthethresholdtemperature,withdefaultvaluesof<2,5,8>
degreesCabovepreindustrialintheSternanalysis.Asecondparameteristherateat
whichtheprobabilityofcatastrophegrows,asthetemperaturerisespastthethreshold.
Thedefaulthastheprobabilityofcatastropheincreasingby<1,10,20>percentagepoints
perdegreeCabovethethreshold.
Muchoftherecentdiscussionofpotentialcatastrophes,suchasthelossoftheGreenlandor
WestAntarcticicesheets,hassuggestedthattheybecomepossibleorevenlikelyat
temperaturesbelowthedefaultmostlikelythresholdof5Cofwarming(e.g.,Rahmstorf,
2007).Sothealternativeassumptionschangethethresholdtemperatureto<2,3,4>
degreesCelsius,andthegrowthintheprobabilityofcatastropheto<10,20,30>
percentagepointsperdegreeCelsiusabovethethreshold.

Theshapeofthedamagefunction
PAGE2002,likemostintegratedassessmentmodels,assumeseconomicandnoneconomic
climatedamagesareafunctionoftemperature,usingasimpleequationoftheform:
Damages=aTN
Here,aisaconstant,Tisthetemperatureincrease,andNistheexponentgoverning
howfastdamagesrise.IfN=2,then4Cisfourtimesasbadas2C;ifN=3,then4Cis
eighttimesasbad,etc.
PAGE2002treatstheexponentNasoneoftheuncertainparametersthatisallowedtovary
intheuncertaintyanalysis,withadefaultinputof<1,1.3,3>.Basedonrecentscientific
assessmentsofclimateimpacts(Smithetal.,2009),themostlikelyvalueof1.3now
appearstoolow.Inthealternativeassumptionswesettheexponentat<1.5,2.25,3>.This
alternativekeepstheexponentwithinthesamerangeusedintheSternReview,but
weightsthehigherendoftherangemoreheavily;itassumesthattheexponentismost
likelytobealittlemorethan2,thevalueusedinmanyrecentmodels(e.g.,Nordhaus,
2008).

PewBenefitsWorkshop|Hope:SCCandEmissionsReductionsUnderUncertainty 111


Noneconomicimpactsandregionalweights
ThePAGE2002defaultshavenoneconomicimpactsas<0,0.7,1.5>percentofGDPinthe
focusregion(theEuropeanUnion)fora2.5degCriseintemperatureabovepreindustrial
levels,lowerinotherOECDregions,andhigherinmostdevelopingcountries,exceptChina,
withregionalmultipliersasshowninTable2.
Somestudieshaveshownthatmanyeconomicmodelsomitarangeofimpactsthatactually
mayprovetobeimportant(Watkissetal.,2006;Ackermanetal.,2009).Commentators
havealsonotedthatregionalweightsgivingmoreimportancetoimpactsinotherregions
oftheworlddonotnecessarilyfitwithactionstakeninotherpolicyareasthataffect
developingcountries(Gardiner,2004).

Table2.DefaultregionalweightfactorsinPAGE2002as amultipleofEUvalues
Source:Hope(2006)
Region Minimum Mode Maximum
EasternEurope&FSUweightsfactor 1 0.25 0.2
USAweightsfactor 0 0.25 0.5
Chinaweightsfactor 0 0.1 0.5
Indiaweightsfactor 1.5 2 4
Africaweightsfactor 1 1.5 3
LatinAmericaweightsfactor 1 1.5 3
OtherOECDweightsfactor 0 0.25 0.5

Toillustratethesegeneralideas,thealternativeassumptionsincreasethenoneconomic
impactsto<0.2,1,2>percentofGDPinthefocusregionandincreasetheUSAregional
multiplierto<0.5,1,1.5>.However,theydecreaseallotherregionalmultiplierstoonehalf
oftheirvalueintable2.

ResultssensitivityofsocialcostofCO2toalternativeassumptions
HowdothesealternativeassumptionsaffectthesocialcostofCO2?Table3showsthatthe
meanestimatedecreasesfrom$120pertonneofCO2,withthedefaultinputs,to$95per
tonneofCO2withthealternativeassumptions,adropofabout20percent.The5percent
and95percentpointsdropbyasimilarpercentage,sotheshapeoftheprobability
distributionofthesocialcostofCO2hasnotchangedagreatdeal.Theprimaryreasonfor
thedecreaseisthelargeraveragediscountrateinthealternativeassumptions,with
smallercontributionsfromdecreasednoneconomicimpactmultipliersindeveloping
countries.Thesechangesoutweighthecombinedeffectofotheralternativeassumptions
thatwouldtendtoincreasethesocialcostofCO2,includinglesseffectiveadaptation,
greaterprobabilityandsensitivitytodiscontinuity,andasteeperdamagefunction.This
resultillustratesthestrongsensitivityoftheestimatedsocialcostofCO2tothechosen
discountrate.

112 Hope:SCCandEmissionsReductionsUnderUncertainty |PewBenefitsWorkshop


Table3.ThesocialcostofCO2in2008,byinputassumption (Source:10000PAGE2002
modelrunsforscenarioA2)
20002200 $US(2008)
5percent mean 95percent
Defaultassumptions 25 120 320
Alternativeassumptions 20 95 250

Figure4showsthetopinfluencesonthesocialcostofCO2withthealternative
assumptions.Foreachinput,thebarshowstheamountbywhichthesocialcostofCO2
wouldincreaseiftheinputinquestionincreasedbyonestandarddeviation.
Theclimatesensitivityisstillthetopinfluence;anincreaseofonestandarddeviation
wouldnowincreasethesocialcostofCO2by$47perton.
Nowtheequityweightbecomesthesecondmostimportantinfluenceandanincrease
ofonestandarddeviationwoulddecreasethesocialcostofCO2byabout$35perton.
Recallthatintheoriginalresults,thediscountratewasfixedatthesinglevalueof0.1
percentperyear,andtheequityweightatthesinglevalueof1,usedintheStern
review,sotheydidnotappearasinfluencesinfigure1.Figure4showsthatahigher
equityweightleadstoalowersocialcostofCO2.Thismightseemcounterintuitive,but
itcomesaboutbecauseofthelogicallinkbetweenequityweightsanddiscountrates;
astheequityweightgoesfrom0.5to2,theconsumptiondiscountraterisesaccording
toRamseysrule(consumptiondiscountrate=puretimepreferencerate+equity
weightxgrowthinGDPpercapita),andthedropinpresentvaluesthatresultsfar
outweighstheincreaseinthevaluationofimpactsinpoorcountriesthatahigher
equityweightbrings.
Theimpactfunctionexponentisnowthethirdmostinfluentialinput,downfrom$47
to$23foraonestandarddeviationrise.Thisdropisatleastpartlybecausetherange
oftheexponentisnowsmaller(i.e.onestandarddeviationisnowasmallerchangein
theparameter).
Thepuretimepreferencerateisthefourthmostimportantparameter.Ahigherpure
timepreferencerateleadstoalowersocialcostofCO2asimpactsinthefutureare
discountedmore.
Thenoneconomicimpactparameterisnowonlyabouttwiceasinfluentialasthe
economicimpactparameter,becausewehavenowassumedthatadaptationwillbe
lesseffectiveatreducingtheeconomicimpacts.
Theinputsrelatingtothediscontinuityimpactarenowlessimportantthanwiththe
defaultinputs,despitetheprobabilityofadiscontinuitybeinghigherwiththe
alternativeassumptions.Forinstance,theinfluenceofthechanceofadiscontinuity
hasdecreasedfrom$13to$3.Thisisbecausethehighermeandiscountratesunder
thealternativeassumptionsmakeimpactsthatoccurinthefarfuturelessimportant.

PewBenefitsWorkshop|Hope:SCCandEmissionsReductionsUnderUncertainty 113

Figure4.MajorinfluencesonthesocialcostofCO2 withalternativeassumptionsinPAGE2002.

Climate sensitivity 47
Equity weight -33
impact function exponent 23
ptp rate -20
Non-economic impact 15
India weights factor 11
Half-life of global warming -11
Proportion of CO2 emitted to air 10
Loss if discontinuity occurs 9
Sulfate indirect (log) effect 8
Economic impact 8
Africa weights factor 5
Chance of discontinuity 3
Stimulation of natural CO2 3
Tolerable before discontinuity -3
Latin America weights factor 3

-40 -30 -20 -10 0 10 20 30 40 50

$US(2008)/tonne CO2

Conclusions&Recommendations
TheresultswiththesealternativeassumptionsdemonstratetheflexibilityofthePAGE2002
model,andtheimportanceofusingamodeltolaybaretheinteractionsbetweenthe
differentpartsoftheclimatechangeproblem,andprovidethebestevidencewehaveto
informclimatechangepolicy.
Thebestevidencemustincludeanassessmentoftherisksanduncertaintiesaswellas
mostlikelyormeanresults.Withourpresentknowledge,thesocialcostofCO2hasarange
ofatleastanorderofmagnitude;thishasimplications,suggestingthatflexibilityand
detectionofsurpriseswillbeimportantcomponentsofagoodpolicytowardsclimate
change.
Thedetailsmatter.Seeminglytechnicalchoices,aboutequityweights,theexponentofthe
impactfunctionandthepuretimepreferencerate,havealmostasmuchinfluenceasthe
moreobviousclimatesensitivityonpolicyrelevantresultslikethesocialcostofCO2.

Acknowledgement
ThedevelopmentofPAGE2002wasfundedbytheGBOfficeofGasandElectricityMarkets.

114 Hope:SCCandEmissionsReductionsUnderUncertainty |PewBenefitsWorkshop


References
Ackerman,F.,E.A.Stanton,C.Hope,andS.Alberth.2009.DidtheSternReviewunderestimateU.S.andglobal
climatedamages?EnergyPolicy37(7):27172721.
DenElzen,Berk,Lucas,Eikhout&Vuuren.2003.Exploringclimateregimesfordifferentiationof
commitmentstoachievetheEUclimatetarget.RIVMreport728001023/2003.RetrievedinMarch
2009fromhttp://www.rivm.nl/bibliotheek/rapporten/728001023.pdf.
Gardiner,S.M.2004.EthicsandGlobalClimateChange.Ethics114:555600.
Gore,Al.2007.NobelLecture,Oslo,Norway.RetrievedinMarch2009fromhttp://nobelprize.org/
nobel_prizes/peace/laureates/2007/gorelecture_en.html.
Hope,C.2006."TheMarginalImpactofCO2fromPAGE2002:AnIntegratedAssessmentModelIncorporating
theIPCC'sFiveReasonsforConcern."IntegratedAssessmentJournal6(1):1956.
HopeC.2006a.Thesocialcostofcarbon:whatdoesitactuallydependon?ClimatePolicy6(5):566572.
HopeC.2008.Discountrates,equityweightsandthesocialcostofcarbon.EnergyEconomics30(3):1011
1019.
Houghton,J.T.,etal.2001.Climatechange2001,TheScientificBasis,ContributionofWorkingGroupItothe
ThirdAssessmentReportoftheIntergovernmentalPanelonClimateChangeCambridgeUniversity
Press.
Morgan,M.G.andH.Dowlatabadi.1996.Learningfromintegratedassessmentofclimatechange.Climatic
Change34(3/4):337368.
NakicenovicN.andSwartR.(eds.).2000.IPCCSpecialReportonEmissionScenarios,CambridgeUniversity
Press,Cambridge,UnitedKingdomandNewYork,NY,USA.
Nordhaus,W.D.2007."AReviewoftheSternReviewontheEconomicsofClimateChange."Journalof
EconomicLiterature45(3):17.
Nordhaus,W.D.2008.AQuestionofBalance:WeighingtheOptionsonGlobalWarmingPoliciesYale
UniversityPress,NewHaven,CT.
NordhausW.D.2009.quotedinTickell,O.,ReplaceKyotoprotocolwithglobalcarbontax,saysYale
economist,Guardian,12March2009.http://www.guardian.co.uk/environment/2009/mar/12/
carbontaxshouldreplacekyotoprotocol.
Rahmstorf,S.2007,ASemiEmpiricalApproachtoProjectingFutureSeaLevelRiseScience,315.368370.
Smith,J.B.,S.H.Schneider,M.Oppenheimer,G.W.Yohe,W.Hare,M.D.Mastrandrea,A.Patwardhan,I.Burton,J.
CorfeeMorloti,C.H.D.Magadza,H.M.Fssel,A.B.Pittock,A.Rahman,A.Suarez,andJ.P.van
Ypersele.2009.AssessingdangerousclimatechangethroughanupdateoftheIntergovernmental
PanelonClimateChange(IPCC)reasonsforconcern.ProceedingsoftheNationalAcademyof
Sciences106:41334137.
Stern,N.etal.2006.SternReview.ReportontheEconomicsofClimateChange,HMTreasury.
Tol,R.S.J.,andG.W.Yohe.2006.AreviewoftheSternReview.WorldEconomics7(4):233250.
Watkiss,P.,Anthoff,D.,Downing,T.,Hepburn,C.,Hope,C.,Hunt,A.&Tol,R.S.J.2006.Thesocialcostsof
carbon(SCC)reviewmethodologicalapproachesforusingSCCestimatesinpolicyassessment,
FinalreporttoDEFRA.http://socialcostofcarbon.aeat.com/files/Final%20Report_7.doc.
Wigley,T.2003.ModellingClimateChangeUnderNopolicyandPolicyEmissionPathways.OECD,
ENV/EPOC/GSP(2003)7/FINAL[retrievedfromhttp://www.oecd.org/dataoecd/33/13/
2489543.pdfinMarch2009].

PewBenefitsWorkshop|Hope:SCCandEmissionsReductionsUnderUncertainty 115